Commentary

The Australian dollar is faring much better this week than last. A better showing from global equity markets in recent days has allowed the AUD to reclaim the parity level against the Greenback. Events last week were bereft of any good news whatsoever which accentuated the slide in risk assets, so it is pleasing to see that there have been at least some positive rumblings from Europe since the weekend.

The AUD has posted a 2 cent gain since Monday, with the bumper 290 point gain on Wall Street Monday night giving the AUD a much needed leg up. The buyers that deserted the currency last week in the face of unravelling equity markets have rediscovered the AUD in recent trading sessions, however the currency’s hold above parity is still looking rather precarious given the alarming levels of Spanish and Italian Yields. Hope alone of a resolution in Europe will only support risk assets to a point, before financial markets demand concrete action. But the longer that this ‘hope’ rally stays afloat the more time the AUD will keep its head above parity.

We had a pretty solid Capex number of 12% (versus expectations of 8.2%) released this morning, which bodes well for the growth prospects of the economy in coming quarters. The strong Capex number saw the AUDUSD rate track higher from 1.0035 to 1.0060 in the first 30 mins following the release. The result of the Capital Expenditure data should see the AUD well supported for the remainder of the Asian trading session, before European Yield prices may sway sentiment again this evening.

ADP private employment figures due in the US tonight will be a closely watched by currency markets, as traders look to gain an insight on how the broader non-farm payrolls will may look on Friday. Anything over the 100k mark when it comes to US jobs will be gladly taken by the market, and a figure pushing 150k would be a real boon for higher yielding currency pairs. Any result in the region of 130k-150k should assist US equity markets and would have the AUD heading for 1.01 on a confidence play.

For an interview or further comment from Tim Waterer please call 02 8221 2185.

Despite a higher open, the Australian market has drifted from positive to negative to positive again on low volume and a lack of interest in equity exposure following the Federal Government's mid year budget review.

Last night's run higher was as much about plans for Europe as it was for Black Fridays, healthy crowds, healthy sales results. The Black Friday numbers beat 2010 sales numbers despite a huge amount of discounting to incite shoppers. Consumer stocks have reacted well today on the news and the results have seen Westfield as one the best performer in the Aussie 200 today.

We are completely headline and rumour driven, and the last 48 hours has tossed up much talk and debate but firm details is what’s lacking. For our market to rally we need confirmation of action.

A push for a more centralised fiscal authority is one reason markets were running hot last night. Germany will not expand the role of the ECB until we have agreement over a closer fiscal union in the Eurozone. This idea means more austerity and therefore further riots. Politically the idea is not viable but desperate times call for desperate measures so it will be interesting to find how this idea develops.

An OECD report that lowered world economic growth and highlighted Eurozone risks is also playing havoc with traders’ minds today. The constant reinforcement that things will need to get worse before they get better is really sucking confidence away from this market.

We now have traders who are telling us that PE’s of 10 or below will become the new norm in the next 6 months as the debt contagion environment plagues expectations of forward earnings.

For an interview or further comment from Ben Taylor please call 02 8915 9309.

The cupboard has been bare this week in terms of any good news stories on financial markets, whilst on the other side of the ledger, the list of negative events has been long and foreboding. Low US GDP, low Chinese PMI, weak German Bond auction, questions over France’s credit rating have all contributed to the selling mind-set of the market this week. The theme this week on global markets has been one of 'what can go wrong, has gone wrong'.

So with very little to cheer about, risk assets this week have been well and truly up against it, so to speak. With no respite to the run of bad news anywhere in sight, the likes of AUD, Euro, Kiwi and Pound will continue to be in the shadows of the Greenback and Yen as traders look for safe havens to park their funds.

The Thanksgiving holiday in the US provided little in the way of a reprieve to high yielding currencies which have all tracked lower during Asian morning trade. The steep fall in the ASX200 today has had repercussions on the AUD also with the currency sinking back below 97c. Performances across other Asian indices today are similarly weak as the losing streak for stocks continues.

The AUDUSD rate fell to a low of 0.9684 by lunchtime today and the unit is likely to remain under pressure heading into the offshore session barring any unforeseen positive development tonight in Europe. A test of 0.9550 on the downside next week could be on if the trading mind-set next week bares any resemblance to what has been on show this week.

For an interview or further comment from Tim Waterer please call 02 8221 2185.

Our markets have staged a recovery today despite sharp falls in the US and Europe overnight. Much of the falls in the overnight markets were felt in yesterday's Australian trading session as the Asian markets tossed up concerns for the Dexia bank rescue and Chinese PMI number.

Our banks are scraping back losses despite rumours of a potential credit freeze in global leading. Some traders are taking long positions in bank pointing to the idea that our banks are the best in the world, with significant valuation and yield support and therefore should not be painted by the same brush as US and European banks

My view is that our banks are susceptible to funding issues and a potential for a collapse in Australian property prices so their prices are currently justified.

Our Australian dollar has been coming under increasing pressure over the last week and yesterday's Chinese PMI figure is widely believed to lead the Australian dollar. Given that the official gauge is likely to fall next month, currency trader are now taking bets that a weak official Chinese PMI number and a continuation of European problems will see Australian GDP growth slow and therefore put downward pressure on the Australian dollar.

Our miners posted small losses today after metals came under heavy attack on the international markets. The PMI figure had metal traders spooked overnight with copper falling to one month lows as industrial metals came into the selling spotlight.

Fitch has suggested that France has limited room to absorb further shocks to its finances without endangering its AAA credit rating. A potential downgrade has seen many traders taking shorts in European indices. The spike in French bonds is further evidence that the market is taking bets that France’s credit rating will be rattled soon.

For an interview or further comment from Ben Taylor please call 02 8915 9309.

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International markets last night signalled that they are not inclined to push risk markets higher without concrete evidence that the new governments in Italy and Greece can implement the reforms required to stabilise public debt and promote economic growth.

The Australian market is likely to follow suit today, opening lower and continuing the pattern of volatile range trading and relatively low volumes seen over the past month.

Whilst the new governments led by reform minded economists are seen as a good starting point for the reform process, implementation will at best take time. Markets can are faced with a medium term outlook full of risk that economic reforms will not survive the political process. Investors will be looking for governments to implement unpopular measures such as increasing pension ages, freeing up industrial relations and rebalancing tax systems to promote long run economic growth. A shock and awe approach to economic reform with definitive packages could see a significant reduction in the risk premium currently built into share prices.

This morning’s announcement that the Prime Minister Gillard will support the overturn of Labor’s ban on uranium exports to India is likely to see uranium stocks supported today. Whilst a final agreement on exports to India may take some time to implement, the PM’s support of this change significantly increases the probability that exports to India will eventually proceed.

Australian investors will also scrutinise the minutes of the latest RBA meeting due for release today. Investors will looking for clues as to whether the recent rate cut is likely only to be part of return to a neutral policy setting with the RBA rate stabilising at 4.25- 4.5% or if we may be embarking on a rate cutting cycle that would see rates pushed down to a more accommodative policy setting.

For further comment from Ric Spooner please call 02 8221 2137.